What Is Cash Equity?
Cash equity most commonly refers to (1) common stock and the (spot) cash equity market that involves large institutions that trade blocks of stock with firm capital and on behalf of customers. These large financial firms that trade large amounts of stock are themselves referred to as cash equity players.
It also refers to (2) a real estate term that refers to the amount of home value greater than the mortgage balance; it is the cash portion of the equity balance. A large down payment, for example, may create cash equity.
How the Cash Equity Trading Markets Work
Cash equity, in financial markets, refers to large financial institutions that trade stocks, or equity securities, on major exchanges, such as the Philadelphia Stock Exchange and the New York Stock Exchange (NYSE). These companies place trades using firm capital and also place trades for institutional and retail, or individual, investors.
Assume, for example, that Merrill Lynch buys 20 million shares of International Business Machines Corporation (IBM) common stock because the firm’s analysts believe the stock price is increasing over the next week. Merrill Lynch invests its own capital and uses computerized trading to place the trade almost instantly. The company hopes to generate a short-term profit and add the profit to firm capital.
Merrill Lynch can also place trades for large institutional customers, such as a mutual fund, and for individuals who work with the firm’s financial advisors. For instance, assume that a mutual fund client wants to purchase 10 million shares of Microsoft Corporation stock. Merrill Lynch negotiates a commission amount and then places the trade using its computerized trading system. On the other hand, if an individual investor wants to buy 100 shares of General Electric Company (GE) stock at the market, Merrill Lynch places the trades immediately using the same computer system. In both instances, Merrill Lynch must place customer trades before placing trades for Merrill Lynch firm accounts, and this policy is in place to ensure fair trade executions for clients. If a brokerage firm wants to buy IBM stock using firm capital, but already has customer orders to purchase the same stock, the broker must place client orders first.
Example of Cash Equity
Cash equity can increase each month: Assume a homeowner buys a $100,000 house with 20% down and the house is worth $130,000. In this case, the owner has $20,000 in cash equity in the property and $30,000 in market equity. The owner's cash equity position increases each month, as a portion of the monthly mortgage payment pays down the principal borrowed. Market equity, however, can change at any time because real estate markets and broader economic conditions fluctuate.